The Indian Consumer Market Will Be Huge, But Very Different From China's: Report

Customers queue for the opening of a Hennes & Mauritz AB (H&M) store in Select Citywalk mall in the Saket area of New Delhi, India, on Friday, Oct. 2, 2015, the first in India. Photographer: Udit Kulshrestha/Bloomberg

Driven by several hundred million young women and men, India’s consumer story will be one of the world’s most compelling in the next 20 years, says Goldman Sachs in a new report.

India’s consumption story will be shaped by its 440 million millennials and 390 million Gen Z (those born after 2000), the report said.

And while there is a temptation to compare the growth of this consumer market with that of China's (which has been widely reported on), the two are different and the Indian consumer market will follow a different path from its Chinese counterpart, predominantly because of the vastly different income levels, which in turn has helped shape preferences and spending attitudes. (India’s 2015 GDP per capita at $1,650 is comparable to what China was in 2005, the report said.)

In China, the first wave of the consumer story was powered by the 150 million Urban Middle workforce and 1.4 million wealthy “Movers & Shakers,” Goldman Sachs said. But in India, the workforce that falls in what Goldman Sachs calls the "urban middle" (or one that earns $11,000 annually) is much smaller at 27 million or a tiny 2% of the population. "It will expand, but investors need to be careful in calibrating the potential addressable market for companies targeting this cohort," the report said.

Most of the new generation of India’s youth will first fall into Urban Mass, a cohort that is 130 million people today, earning $3,200 on average, the report said. (These are people who make up about one-fourth of the Indian workforce wherein about 32 million are the ‘Educated Urban Mass’ who have an undergraduate degree and are employed in non-labor intensive jobs and the rest of the Urban Mass are blue collar workers or migrant laborers.) The expansion of Urban Mass, both in size and income level, will be the key driver of India’s consumption story in the coming 5-10 years.

"With a young, tech-savvy population, improved education and rapid growth, India is creating a consumer market deeply tied into mobility and connectivity," the report said. "Where spending in neighbors like China is driven by an emerging Urban Middle class, we see the greatest opportunities in India in the much larger Urban Mass."

Goldman Sachs offers some insights:

Brand investing will be a big theme in everything. But be careful: India’s Urban Mass will trade up into brands that offers the most incremental value, but may not readily jump to aspirational brands. In purchasing a car, for example, an Indian consumer’s first criteria is the brand’s reputation for fuel efficiency.

Where India will leapfrog the most: Mobile connectivity and E-commerce. Payment systems and supply chain challenges remain but are not insurmountable. Improved mobile connectivity will also challenge the domination of TV as a primary source of household entertainment over time, creating a bigger profit pool for content providers and mobile gaming.

Growth of luxury and high-end in general will be limited. Culturally, India’s affluent consumers tend to shy away from ostentatious display of wealth. One area where Indians do splurge on: weddings. The number of weddings and household formations will increase over the next five years, given India’s demographics (peak birth reached 22-23 yrs ago).